A New Obamacare Detail That Could Save You Some Money—Or Cost You Even More
Economists love this idea, consumer advocates hate it, and both may be right

Imagine you’re in your fifties and, after years of living in pain, you decide finally to get that knee replacement. Your physician recommends a local hospital, where he happens to have privileges. You are a savvy consumer, so first you make sure that that the hospital is part of your insurance network. It is. You get the procedure and then, a few weeks later, you get the bill—for $15,000. That can’t be right, you think. Your plan, which you get from your employer, is supposed to limit your out-of-pocket spending to only a few thousand dollars a year. The Affordable Care Act makes a similar guarantee.

You’re right about what the plan says it allows and what Obamacare is supposed to require. But you’re on the hook for that money anyway. You can thank a new way paying for medical services—and a tentative decision by the Obama Admninistration, little noticed until the AP’s Ricardo Alonso-Zaldivar wrote about it last week, allowing employers and their insurers to use the scheme without much oversight.

The system is called “reference pricing” and my health economist friends love it. They think it will mean less spending on health care—first, by encouraging people to shop for better deals and, eventually, by encouraging hospitals to lower their prices. But the consumer advocates and insurance experts I know are queasy over the rules governing its use. Without more safeguards, they worry, beneficiaries won’t understand the new system and will end up running up many thousands of dollars in bills—thereby weakening one of Obamacare’s most important new protections.

Both groups make a pretty good case.

Here’s how reference pricing works. An insurance company decides to set a fixed, fee for a common procedure. Hospitals and surgery centers are free to charge more and beneficiaries are free to seek care at those providers. But in such cases, the beneficiaries would have to pay the difference out of their own pockets. If you owed $15,000 for that knee replacement, for example, that might mean your insurer had set the price at $30,000—and you went to a hospital that charged $45,000. The hope is that very few beneficiaries would do that. Armed with information about prices and reimbursement, most would seek out hospitals and surgery centers that charge less. Hospitals and surgery centers charging more would lose business and, in response, they’d lower their prices. In short time, a truly competitive market for individual medical services would evolve.

It’s not as pie-in-the-sky as it might sound. CalPERS, the massive private insurance plan for public employees in the state of California, introduced reference pricing for knee and hip replacements a few years ago. According toan analysis by James Robinson and Timothy Brown, the results were pretty dramatic. The hospitals that charged lower prices got a ton of more business, apparently at the expense of the hospitals charging a lot more. Providers noticed and responded exactly as economists hoped they would. The pricier hospitals started charging less, reducing their fees by more than one-third. (See the graph below.) CalPERS ended up saving $2.8 million, while individual members getting the surgeries realized a net reduction in out-of-pocket expenses of about $300,000. On avearge, that works out to about $700 per patient—the result, primarily, of people seeking out cheaper facilities. That's real money.

The analysis, published in the journal Health Affairs, found no decline in quality. And that may be because CalPERS implemented the scheme with relative caution. CalPERS set the reference price at a level that, it knew, that the majority of hospitals meeting basic quality criteria were already charging. CalPERS also spent a lot of time educating its beneficiaries about the new reimbursement scheme, to make sure that people understood the choices they faced—and the extra money they’d have to spend if they opted for one of the higher cost hospitals. Finally, CalPERS limited the experiment to non-emergency, commonly performed procedures where shopping by price was possible and potentially useful. It didn’t try applying the scheme to appendectomies or cancer surgery, for example, on the (very sound) theory that people who need such services are frequently in a poor position to compare services and prices.

The CalPERS experiment has gotten a lot of attention and praise. In a survey that Mercer published last year, 11 percent of large employers said they were already using reference pricing and another 13 percent said they were contemplating it. But employers had worried about how it’d work in the future—because, as constructed, it potentially ran into one of the Affordable Care Act’s key protections.

Remember, Obamacare places a limit on out-of-pocket spending. This year, it’s $6,350 for an individual policy. For a family policy, it’s $12,700. If those limits applied even to people seeking care at more expensive providers, that could limit the financial incentive to shop around. Employers and insuers sought clarification—and, in early May, they got it. The Obama Administration effectively said charges in excess of reference prices would not count towards out-of-pocket limits. (The clarification does not affect plans sold through the new Obamacare marketplaces. Those plans are subject to more rigorous regulation.) If you decide to get care at a provider that charges above the reference price, you're going to owe the difference—and Obamacare's limits won't apply.

What's the danger here? For one thing, insurers might apply reference pricing to a much wider range of services than CalPERS did—and, in some cases, set payment levels so low that access to providers is difficult. Even if insurers don’t take these steps, confused beneficiaries could get tests or procedures at more expensive facilities that cost them many thousands of dollars, well beyond what they are supposed to face under the Affordable Care Act’s guidelines.

It’s hard to know how frequently this happened during the CalPERS experiment, if it happened at all. But the fact that a sizable number of beneficiaries continued to get procedures at higher cost facilities, incurring extra out-of-pocket costs for no apparent reason, raises the possibility that not everybody quite understood the choices they faced. Keep in mind that many people will get procedures wherever their physicians tell them—without thinking to shop around.

In some respects, reference pricing is of a piece with another cost control technique that’s become more popular in the last few years—limiting beneficiaries to “narrow networks” of doctors, clinics, and hospitals willing to accept lower price. The difference with reference pricing is that it provides a second, added layer of restrictions and incentives. It’s also more novel, because limited networks of one sort or another have been around since the 1980s. The piling of one restriction upon another makes it that much more dangerous, particularly since given that Obamacare's out-of-pocket limits were already pretty lax and that many people still don’t understand the basics of insurance.

“Market based solutions work best when there is symmetric information between consumers and providers,” Karen Pollitz, a senior fellow at the Kaiser Family Foundation, told me “But health insurance literacy is limited for many, many consumers. Studies show people struggle with concepts like ‘deductibles’ and ‘coinsurance’ and how they apply. The financial consequences to consumers are already high, and could become more burdensome as more intricate rules are introduced.”

The dangers are real enough that the Administration acknowledged them explicitly, in the document clarifying how Obamacare's rules apply to reference pricing: “Such a pricing structure may be a subterfuge for the imposition of otherwise prohibited limitations on coverage, without ensuring access to quality care and an adequate network of providers.” That document also warned that employers and insurers using reference pricing must use “a reasonable method to ensure that it provides adequate access to quality providers.”

That doesn't mean a whole lot, but the administration said it wanted public input on standards and regulations that might safeguard against problems and abuses. The input will probably sound something like this comment, provided via email by Lydia Mitts, a health policy analyst atFamiliesUSA:

We are glad to see that the administration is considering standards for reference-based pricing structures to ensure that consumers have meaningful access to care. While reference pricing can be useful tool to address price variation, it's not appropriate for all types of care and should not be used as backdoor way to hinder access to care or shift costs to consumers. This type of pricing should only be applied to select shopable, scheduled health care service. These programs also only work if consumers have access to accurate price information, in an easily understandable format. Programs must have robust consumer education and shopper tools to ensure that consumers have the support necessary to find a provider within the reference price.

At the least until the administration issues standards to ensure that these safeguards are in place, we think any out-of-pocket costs consumers incur from seeing a provider that charges beyond the reference price, but that would otherwise be in-network, should count towards their out of pocket limit. We don't want to see reference pricing used as a tool to erode the out-of-pocket protections in the ACA and think further standards need to be in place to ensure that these programs are built in an appropriate and consumer friendly manner.

The deadline for comments is August 1, which means consumer advocates have about two months to make sure the administration hears these concerns—and responds to them.